CRM Buyer just published one of the best articles I’ve ever stumbled across. In TCO, ROI, and the Difference Between Price and Cost, the author makes a point that is overlooked far too often by far too many buyers when they are shopping for new supply chain solutions:
|Customers must be sure that THEY own the definition and calculation of TCO and don’t allow the vendor to drive the agenda.
As the author clearly states, vendors will try to manipulate and obfuscate the true TCO of their solution and it will be different for each installation. Plus some of the costs, like risk and opportunity, are nebulous and hard to define. Vendors will try to make other vendors’ solutions look risky when, in fact, for you they might be less risky.
That’s why, on multiple occasions, I’ve tried to lay out the true, long term, costs of supply management solutions, as I did in this post in Uncovering the True Cost of On-Premise Sourcing & Procurement Software, in this post The Total Cost of Ownership Equation in a Green Economy, and this post on Know Your Software TCO & TVM, for example. The true, long term, cost is always more than you think and much more than the vendor will let on. It’s like the car example given in the article. If you’re going to sell after five years, the total cost is the price plus five years of maintenance and repairs (and insurance and gas) minus the expected selling price, and when everything is factored in, a more expensive car that costs more but retains its value might be worth more than a cheap car that loses the majority of its value and costs four times as much to maintain.
Before you make a decision, you have to determine the total cost of each solution over the intended lifetime. Only then you can decide if the solution with the greater (annualized) cost truly brings more value. If a solution costs 20% more but increases productivity by 40% or decreases risks by 30%, it might be worth it. However, if a solution costs 100% more but brings no additional value of any kind, it’s not worth a second look. And this is not something you will know until you slice through the vendor obfuscation and normalize the costs, which is something you can only truly do if you own the calculation.